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FALL 2017 OUTLOOK: As Focus Shifts From Congress to SEC, Progress on Nominations Is Key

September 16, 2017

With House-passed Dodd-Frank reform unlikely to move due to a slim Republican majority in the Senate, the SEC will be a focal point for policy changes for the foreseeable future.

Confirmation of Nominees for Open SEC Slots Will Play a Key Role in Action on Pay Ratio, Other Priorities. As companies prepare to disclose pay ratio data in 2018, the requirement is likely to be altered or delayed only through potential SEC action. However, the SEC currently has just three of five confirmed members—two Republicans, Chair Jay Clayton and Michael Piwowar and Democrat Kara Stein. Under the Commission's quorum rules, it can only hold a public meeting (which is generally required to approve rulemakings or take other official action) if three members are present. Thus, until another Republican Commissioner is nominated and confirmed, Commissioner Stein can effectively block any regulatory action, including an action to delay or reopen the pay ratio rules. President Trump nominated Hester Peirce, a former SEC attorney and Senate Banking Committee Counsel who was also nominated by President Obama, to the Republican slot in July, and Columbia Law Professor Robert Jackson, a former Obama administration Treasury official who helped oversee executive compensation under the TARP program, to serve as the Democrat nominee. The nominations will move as a package, and given the confirmation process in the Senate, it may be late October—or later—before the Commissioners are confirmed.

SEC Unlikely to Move on Dodd-Frank Pay for Performance, Clawbacks Rules. This Year SEC Chair Jay Clayton stated in a July speech that he is focused on the agency's traditional missions of capital formation, investor protection, and market efficiency, and subsequently indicated that the agency is reviewing the burdens imposed by the pay ratio and its potential options for reducing unanticipated compliance burdens, including extensive comments submitted by our Center On Executive Compensation. In his speech, Clayton reaffirmed that disclosure should be focused on material information, indicating a move away from the more socially-oriented rulemaking agenda imposed on the SEC by Congress. Consistent with this theme, the SEC has indicated that it is not likely to take further action on implementing the Dodd-Frank Pay for Performance or Clawbacks rules this fall, neither of which has a statutory deadline.

Groups to Continue to Press for ESG, Human Capital Metrics Disclosure. Activists seeking greater disclosure of Environmental, Social, and Governance information, including human capital metrics, continue to promote their causes using the SEC, even though they are unlikely to achieve traction. Recently, a coalition of pension funds and other investors petitioned the SEC to develop a disclosure standard on human capital metrics, while a UK-based shareholder coalition launched a survey of large employers seeking detailed human capital information. Meanwhile, shareholder resolutions on climate change at certain companies jumped from 22 percent support in 2016 to 30 percent support in 2017. It is also anticipated that certain investors will continue the shareholder proposal campaign on gender pay disclosure which started last year, even though most of last year's proposals did not exceed 20 percent shareholder support.

Global Front: UK Introduces Pay Ratio Disclosure, Say on Pay List, Employee Board Input While Simplification Push Continues. UK Prime Minister Theresa May's government recently unveiled less extensive executive compensation reforms than originally anticipated. Parliament is expected to pass May’s recommendation of disclosure of a CEO-to-employee pay ratio (based on average rather than median worker pay), require tracking of companies that experience a drop in say on pay support of 20 percent or more year over year, and give workers a more prominent voice on the board through formal or informal channels. Beyond the UK, expect the European debate over executive compensation complexity to continue, with some U.S. investors starting to raise the issue. The Center has developed an overview of the debate over simplification of design versus improved and clearer disclosure within the context of competitive and aligned executive compensation in anticipation of a broader debate on the issue.